buffalonate (93.17)

5

Warren Buffett has always said be fearful when others are greedy and greedy when others are fearful. In August of 2011 when everyone was running away from Bank of America's stock Buffett bought $5 billion worth of preferred Bank of America stock at $7.14 with a 6% annual dividend yield. He also got warrants to buy $5 billion worth of Bank of America at $7.14. Now 16 months later Bank of America is trading at $10.56. Between the preferred stock, the dividends, and the warrants, Buffett's investment is now worth around $5.3 billion more than it was 16 months ago. I remember back when Buffett made this deal the the message boards were full of people saying he was senile and they were sure he was going to lose his money. Looks like Buffett is laughing all the way to the bank. [more]

Recs

6

Chipotle has now dropped from $442 to $250 in the last 6 months or so. This crash was about as predictable as they come. For awhile this company had a p/e ratio over 50 which is insane for a large restaurant chain. I remember laughing at Jim Cramer when he was arguing that Chipotle was a better stock to own than Buffalo Wild Wings because the same store comps were stronger. Cramer didn't seem to care that the earnings growth for Buffalo Wild Wings and CMG were almost exactly the same and that CMG had a p/e ratio almost twice that of Buffalo Wild WIngs. Cramer as usual got wait too excited about fast growth and completely ignored the fact that the company was extremely over-valued. Peter Lynch was one of the greatest investors of all time and in his book "One Up On Wall Street" he explains that a growth company is fairly valued when its earnings growth rate is roughly equal to its p/e ratio. This advice has kept me from losing a lot of money by avoiding buying into the over-priced hot growth stock that is getting all of the publicity at the moment. [more]

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3

The markets recently celebrated Europe's latest attempt to solve the debt crisis. This caused a couple days of relief until people realized that the pact didn't go nearly far enough to solve the problem. Basically the pact says that each country in the European Union has to keep its deficit under 3% of gdp. To provide perspective for us it would mean we couldn't go over a $450 billion annual deficit. That is a decent start to austerity but it doesn't go nearly far enough to end their crisis. The pact also wouldn't even be enacted for 3 months. The agreement also pushes up the timeline of the permanent bailout fund by a year. The problem is that Italy and Spain have huge amounts of debt that will need to be sold in the next few months and that bailout fund will not be available to help yet. That tells me that the next few months will get really ugly because there is not enough money available at the IMF or the EFSF to provide all the loans these two countries will need. [more]

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13

I have been reading about the Chinese real estate bubble for at least a year now. Time Magazine has had a couple of articles showing completely empty newly constructed cities. They also explained how investing in real estate had become the national past time. People invested all of their money in new real estate investments and it appears crap has finally hit the fan. All of their money is tied up in apartments that they can't sell. For 3 months in a row real estate prices have fallen. They are now down more than 20% in the last 3 months. Real estate prices had tripled in the last few years so it was just a matter of time before the bubble deflated. Here is a video from Reuters explaining the problem. http://www.reuters.com/video/2011/12/02/chinas-real-estate-ghost-towns?videoId=226140847 The Chinese govt's answer to every problem is to build more stuff so it should be interesting to see how they respond to this crisis. [more]

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9

Does anyone really believe that our politicians will ever get our deficit under control. Our only way out of our fiscal mess it to take it out of the hands of the politicians. Politicians don't have the balls to make tough decisions. They only care about not making their core constituency mad so they can get re-elected. What we desperately need is a financial control board that is filled with non-politicians to balance the budget. The City of Buffalo and the surrounding county of Erie County both were nearly bankrupt a few years ago. The state set up a financial control board for each of them. The control boards were filled up with non-politicians and made the tough choices. Now both governments are solvent and have money set aside for a rainy day. We need a constitutional amendment that will allow the federal government to do the same thing. This constitutional amendment would put a financial control board in charge of our budget process for the next 10 years or so. If you filled the financial control board with a combination of former politicians and budget experts our budget problems could be solved very easily. I see this as the only realistic option for saving our country from certain doom. [more]